Principles of Corporate Finance—Chap009.pptVIP

Risk,DCF and CEQ Example Project A is expected to produce CF = $100 mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project? Now assume that the cash flows change, but are RISK FREE. What is the new PV? Since the 94.6 is risk free, we call it a Certainty Equivalent of the 100. Risk,DCF and CEQ Example Project A is expected to produce CF = $100 mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project? DEDUCTION FOR RISK Risk,DCF and CEQ Example Project A is expected to produce CF = $100 mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?.. Now assume that the cash flows change, but are RISK FREE. What is the new PV? The difference between the 100 and the certainty equivalent (94.6) is 5.4%…this % can be considered the annual premium on a risky cash flow Risk,DCF and CEQ Example Project A is expected to produce CF = $100 mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?.Now assume that the cash flows change, but are RISK FREE. What is the new PV? Homework #8,#9,#11,#12,#21 Group work: Real-time data analysis (P237) 2 1 1 1 1 1 3 2 2 2 2 2 Debt: cost of capital is lower than equity, because the interest rate is settled at the very beginning. Limited time span of debt and it is a duty of a corporation. If firms only finance their projects with equity. We can get the cost of capital using CAPM. With the same rate of return, according to cost of capital rule, company has to choose the left part and abandon the right part (low risk projects). When a project has a higher beta coefficient with the market, it means the risk of the project is consistent with systematic risk. * Nope. With the increase of debt financing, the earnings of shareholders decreases. The bank